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I became a Becton Dickinson shareholder in February 2009. For the first several years of ownership, BDX's financial performance was fine. The addition of Carefusion in 2015 worked out fine but following the C.R. Bard acquisition in December 2017, things started to go downhill. The spin off of its Diabetes Care business into a newly created entity (Embecta - EMBC) in April 2022 has certainly contributed toward BDX's improved results. Secondly, BDX made a small divestiture (~$0.54B) in 2023 with the sale of its instrumentation platform to STERIS. Thirdly, BDX has finally received U.S. Food and Drug Administration (FDA) clearance for its BD Alaris™ Infusion System. BDX's recent performance now offers hope for an improvement from its abysmal average total annual rate of return in recent years.
NOTE: I quickly divested the EMBC shares I received as part of the spin-off.
When I last reviewed BDX in this November 17, 2022 post, the most current financial information was the Q4 and FY2022 results and FY2023 guidance. With the May 2, 2024 release of Q2 and YTD2024 results and updated FY2024 guidance, I now revisit this existing holding.
Business Overview
BDX is a global medical technology company engaged in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.
It consists of three worldwide business segments:
- BD Medical
- BD Life Sciences
- BD Interventional.
BDX used to be considered a recession-resistant business. Many of its medical products shielded the company from capital spending-related volatility. This changed, however, when it acquired C.R. Bard in December 2017. The businesses acquired in this acquisition exposed BDX to revenue volatility.
The best sources of information to learn about BDX are its website and its FY2023 Annual Report/Form 10-K.
BD Alaris Pump
In my prior posts I touch upon the Alaris pump remediation issue and the negative implications on BDX's results.
In July 2023, BDX disclosed that its updated BD Alaris™ Infusion System had received 510(k) clearance from the U.S. Food and Drug Administration (FDA). This clearance enables both remediation and a return to full commercial operations for the most comprehensive infusion system available in the US.
Q2 was the second full quarter since clearance of the new Alaris system. In addition, Q2 set a record in the number of BD Alaris pumps manufactured and the number of pumps shipped in a quarter to upgrade BDX's customers to the FDA approved version of the pump. Furthermore, YTD2024 Alaris sales have already eclipsed total FY2023 Alaris sales.
BDX is also seeing an acceleration of committed contracts, inclusive of competitive conversions as health systems look to standardize their fleet.
Financials
Q2 and YTD2024 Results
BDX's Q2 and YTD2024 results are accessible here.
BDX's initiatives are continuing to drive net cost improvement which contributed to Q2 adjusted diluted EPS of $3.17. This is double digit growth or 10.8% on a reported basis.
YTD free cash flow (FCF) increased more than $0.9B YoY to just over $1.1B. This increase reflects continued improvements around working capital including BDX's the optimization of inventory levels, continued discipline around capital investments, and leveraging the fixed asset base.
The focus remains on FCF conversion. Management expects another double-digit step improvement in FY2024.
BDX has repurchased $0.5B of common shares and distributed $0.55B of dividends in the first half of FY2024.
Cash and short-term investments amounted to ~$3.2B. This includes ~$2B in proceeds from debt refinancing during Q2 which will be used to repay maturing debt over the balance of the calendar year.
FY2024 Guidance
Revenue growth accelerated in Q2 with increasing volumes across BDX's consumables and Alaris. Margin performance drove adjusted EPS ahead of expectations thus giving management the confidence to once again increase its FY2024 adjusted EPS guidance.
The following reflects BDX's most current FY2024 guidance and guidance presented with the release of Q1 2024 results.
This is BDX's FY2024 guidance presented with the release of FY2023 results.
Operating Cash Flow (OCF), Free Cash Flow (FCF), and CAPEX
BDX has delivered strong cash flow in the first half of FY2024 thus giving management the confidence that FY2024 will be another year of double-digit FCF growth.
In FY2014 - FY2023, BDX generated OCF of approximately (in billions of $) 1.744, 1.729, 2.559, 2.550, 2.865, 3.330, 3.539, 4.648, 2.634, 2.989, and 1.369 in the first half of FY2024.
In FY2014 - FY2023, BDX generated FCF of approximately (in billions of $) 1.091, 1.133, 1.866, 1.823, 1.970, 2.373, 2.770, 3.454, 1.661, 2.115, and 1.119 in the first half of FY2024.
Annual CAPEX in FY2014 - FY2023 was approximately (in billions of $) 0.653, 0.596, 0.693, 0.727, 0.895, 0.957, 0.769, 1.94, 0.973, 0.874, and 0.250 in the first half of FY2024.
Return On Invested Capital (ROIC)
High quality companies often generate a high ROIC. If a company generates a high ROIC, it needs to invest less to achieve a certain growth rate thus reducing the need for external capital.
When a company consistently generates a high ROIC over the long term and it is growing its revenue, it can reinvest a portion of its profits under favorable conditions thereby leading to a compounding effect. I would much rather invest in a growing company that can reinvest to create greater shareholder value than to invest in a company that has limited growth opportunities and thus chooses to distribute a growing dividend.
A company that generates $0.15/profit for every $1 invested, for example, achieves a ROIC of 15%. I consider a ~15%+ ROIC to be a reasonable minimum threshold because most of the time, a company's cost of capital will be lower than this level. BDX's ROIC in recent years has not come remotely close to 15%!
When I initiated a position on February 11, 2009, my decision was partially based on historical double digit ROIC performance. In FY2009 - FY2014, BDX's ROIC (%) results were 18.85, 18.76, 17.73, 15.56, 15.84, and 13.91.
In 2015, however, BDX acquired. It then acquired C.R. Bard in December 2017. Following these acquisitions, BDX's ROIC (%) plummeted in FY2015 - FY2023 to 7.1, 6.69, 5.09, 1.69, 3.71, 2.99, 5.86, 4.94, and 4.32.
Risk Assessment
BDX's net leverage ratio (Net Debt/Adjusted EBITDA) at FYE2021, FYE2022, and FYE2023 was 2.6x, 2.8x, and 2.6x. At the end of Q2 2024 it was 2.6x. These levels are within BDX's 3.0x target.
There have been no changes to BDX's domestic senior unsecured debt ratings from the time of my November 17, 2022 post.
All 3 ratings are the middle tier within the lower medium grade category. They define BDX as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity for BDX to meet its financial commitments.
These ratings are satisfactory for my purposes.
Dividend and Dividend Yield
BDX’s dividend history is accessible here.
On April 30, BDX declared its 3rd consecutive $0.95 quarterly dividend. I expect one more $0.95 quarterly dividend will be declared in late July. In early November, the dividend will likely be increased ~$0.04. If this does materialize, the next 4 quarterly dividend distributions will total $3.92 calculated as follows ($0.95 + (3 x $0.99)). Using the current $235 share price, the forward dividend yield is ~1.67%.
Some investors fixate on dividend metrics and may use BDX's track record of 52 consecutive years of dividend increases as a deciding factor to invest in the company. I suggest investors focus on an investment's total return potential.
Unfortunately, BDX's total shareholder return over the past 6 years has been horrendous; the average annual total return is ~2.7% and a $10,000 investment made on May 8, 2018 is only worth ~$11,735. This is a far cry from the low double digit average annual total returns BDX used to generate.
The weighted average number of outstanding shares in FY2011 - 2023 (in millions rounded) is 226, 209, 199, 198, 208, 218, 224, 265, 275, 282, 292, 287, and 288.
In Q1, BDX executed and settled accelerated share repurchase agreements for the repurchase of 2.118 million shares of its common stock for total consideration of ~$0.5B. The purchase was made pursuant to the repurchase program authorized by the Board on November 3, 2021, for 10 million shares for which there is no expiration date.
The average common equivalent shares outstanding assuming dilution was 290.344 in Q2 2024 versus 285.645 in Q2 2023.
Valuation
In my November 17, 2022 post, I provide BDX's valuation based on adjusted diluted earnings at the time I wrote prior posts.
When I wrote my November 17, 2022 post, BDX's FY2023 guidance was for adjusted diluted EPS of $11.85 - $12.10. Using the current ~$222.40 share price, the forward adjusted diluted PE range was ~18.4 - ~18.8.
Using this share price and adjusted diluted EPS guidance from the brokers which cover BDX, the projected adjusted diluted PE levels were:
- FY2023 - 12 brokers - mean of $11.93 and low/high of $11.80 - $12.00. Using the mean, the forward adjusted diluted PE was ~18.6.
- FY2024 - 13 brokers - mean of $13.31 and low/high of $12.69 - $13.61. Using the mean, the forward adjusted diluted PE was ~16.7.
- FY2025 - 7 brokers - mean of $14.76 and low/high of $14.46 - $15.15. Using the mean, the forward adjusted diluted PE was ~15.
BDX's FY2024 adjusted diluted EPS guidance is $12.95 - $13.15 (a $13.05 mid-point). Using the current ~$235 share price and the mid-point, the forward adjusted diluted PE is ~18.
Based on the current ~$235 share price and adjusted diluted EPS broker estimates, BDX's forward adjusted diluted PE levels are:
- FY2024 - 12 brokers - mean of $13.04 and low/high of $12.98 - $13.09. Using the mean, the forward adjusted diluted PE is ~18.
- FY2025 - 12 brokers - mean of $14.25 and low/high of $14.05 - $14.43. Using the mean, the forward adjusted diluted PE is ~16.5.
- FY2026 - 8 brokers - mean of $15.70 and low/high of $15.34 - $15.97. Using the mean, the forward adjusted diluted PE is ~15.
In FY2023, BDX generated 2.115B of FCF and management is targeting double-digit growth in FY2024; 11% growth is ~2.348B. In the first half of FY2024, BDX generated $1.119B of FCF meaning it needs to generate 1.23B in the second half of FY2024. This appears achievable.
The average common equivalent shares outstanding assuming dilution was 290.344 in Q2 2024. If this increases to ~291 million shares for the entire year, BDX should generate ~$8.07 of FCF/share ($2.348B/291 million shares). Divide the current ~$235 share price by $8.07 and we get a P/FCF of ~29.1. In comparison, BDX's P/FCF in FY2022 and FY2023 was ~27.7 and ~23.5.
BDX remains focused on FCF conversion. Hopefully this will lead to an improvement in its P/FCF ratio.
Final Thoughts
Several years ago, BDX was one of my top 10 holdings. On October 1, 2022, however, I decided to exit my BDX exposure in a 'Core' account within the FFJ Portfolio as part of my RRSP meltdown strategy.
When I completed my 2023 Year End FFJ Portfolio Review, BDX had dropped to my 27th largest holding. Now, I hold 434 shares in a 'Side' account in the FFJ Portfolio and BDX is probably not a top 30 holding as I compose this post.
I became a BDX shareholder in February 2009 at which time its credit risk was upper medium grade investment-grade. Furthermore, it had a history of generating mid to upper teens ROIC. That all changed starting in 2015 with the Carefusion acquisition. Things got worse when BDX acquired C.R. Bard in December 2017. These acquisitions significantly transformed BDX but the credit risk increased significantly with the domestic senior unsecured long-term debt ratings falling 5 tiers to the highest non-investment grade (speculative or 'junk'). BDX has subsequently improved its credit ratings as reflected in the Risk Assessment section of this post.
I have seriously debated on whether to exit my position. Management, however, lay out a game plan as to how it was going to improve investor returns. I, therefore, am 'sitting tight' but am not adding to my exposure. My plan is to assess BDX's performance a bit longer before deciding my next course of action.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long BDX.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
